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A pension loophole: How charters can exploit the ‘bizarre’ Pa. payment structure

When charters fail to pay into the retirement system, districts are on the hook.

The School District of Philadelphia headquarters.
Photo: Emma Lee/WHYY

This article was originally published in The Notebook. In August 2020, The Notebook became Chalkbeat Philadelphia.

Charters that participate in Pennsylvania’s teacher pension system are supposed to make quarterly contributions to the state’s Public School Employees’ Retirement System (PSERS).

Typically, they do – on time and in full.

But in Philadelphia, seemingly every quarter, a handful of charters come up short or fail to make required payments altogether. What happens next is an example of the disjointed relationship among the state, its traditional school districts, and its charter schools – a relationship that has come under increasing scrutiny.

“It’s a very odd system,” says Uri Monson, the School District of Philadelphia’s chief financial officer. “Essentially you have what should be a direct transaction between the charter school, which owes the money, and the state, through PSERS, which is supposed to collect the money. This bizarre system puts us in the middle of a transaction we have nothing to do with and forces us to ultimately sort of become the collection agency for the state.”

Here’s how that “bizarre” system works.

When a charter fails to make a pension payment, the state covers the shortfall. That part is prescribed by law. The state, of course, does not want to be on the hook for pension payments that a charter school was supposed to make. The problem is that the state can’t go directly to the charter school and ask for a reimbursement, because in Pennsylvania, money does not typically flow from the state to its charter schools. Rather, in Pennsylvania, the state pays its traditional school districts, which in turn pay the charter schools.

Because of that hitch, the state has to dock the district whatever amount the charter school failed to pay. The district then withholds that same amount of money from the charter.

“It’s not our transaction, yet we get put in the middle and end up looking like the bad guy,” says Monson.

The most prominent recent example of this happened at Delaware Valley Charter High School. The District is withholding $820,000 from the long-troubled charter, according to the Philadelphia Inquirer. Roughly a quarter of the money owed – about $216,000 – stems from delinquent PSERS payments.

The Inquirer reported that teachers from DelVal contacted Monson, saying that the District’s withholding hurts them – they aren’t getting paychecks, even though they aren’t the ones at fault. Monson explained the issues to them, but did not change his stance.

Delaware Valley, says Monson, is the only currently operating charter that has consistently failed to meet its pension obligations. But it’s far from the only charter in Philadelphia to miss a payment.

In June, eight charter schools failed to pay all or some of their pension obligations and the District had to withhold roughly $728,000. Last June, there were 13 delinquent charters, with missed payments totaling about $729,000. In the past year, the District’s monthly withholdings have climbed as high as $1.4 million, according to Monson.

In many of those cases, says Monson, the missed payments are small – some less than $5,000 – and stem from honest miscalculations by the schools of what they owe. In other cases, schools miss their payments. In still other cases, says Monson, schools in financial distress can leverage a missed pension payment as a sort of no-penalty extension.

Because of the path that charter money takes in Pennsylvania, it can be up to three months before a missed pension payment by a charter school results in funds actually being withheld.

“Schools that choose to take advantage essentially get a float for awhile," says Monson.

Monson says the last charter to habitually miss its pension payments was Walter D. Palmer Leadership Learning Partners, which closed suddenly at the end of 2014 amid financial troubles. Before shutting its doors, Palmer missed payments of $600,000, according to District documents at the time. Under the law, the District, not the state, would be on the hook for that money.

“It can be a fiscal red flag when schools are not able to make their routine, regular payments,” says Monson. “That causes us some concern to look at the overall financial issues.”

The pension payment loophole is simply the latest oddity to arise from Pennsylvania’s much-criticized charter law.

It hasn’t been substantially revised since its passage in 1997, and the law became a flashpoint in Harrisburg during the recent budget negotiations. Despite a strong push by charter advocates to make substantial changes in the law as part of the budget deal, legislative leaders ultimately put off the issue until later.

Proponents stressed that the revisions they championed would increase charter accountability and transparency and review the problematic charter payment system. But opponents, including Philadelphia Schools Superintendent William Hite, argued that as written, the legislation would have limited districts’ ability to control charter growth and manage their quality. He and others have long said that unfettered charter growth produces a crippling financial drain on District schools.

Hite said that he planned to establish a committee of District and charter representatives to look at the entire charter payment system and make recommendations to the state. Lawmakers indicated that they would resume the battle over changes to the charter law in the fall.

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